Saturday, June 02, 2007

Causes of inflation: spot the flaws

Sayyari, governor of the Saudi Arabia Monetary Agency (Sama), said the kingdom paid for less than 25 per cent of its exports in currencies other than the dollar and the riyal. "One of the important factors that can have an impact on inflation is the rise in public spending," Sayyari said on state-run Saudi Channel 1.

"It's important to coordinate monetary policy and government spending to limit the impact on inflation and that is always available through continued dialogue with the finance ministry," he said....Any appreciation of the Saudi riyal would reduce local currency revenue from dollar-denominated oil exports. While that may not be a concern in smaller countries such as Kuwait, it could sway policy in Saudi Arabia, where public debt topped 100 per cent of gross domestic product during a spell of low oil prices in the 1990s.

Saudi Arabia, the region's strongest advocate of dollar-pegged exchange rates, has a much lower inflation rate than some other Gulf states....Sayyari said the widely varying inflation rates in countries with dollar pegs showed exchange rates were not to blame for price rises. "This proves that the causes of inflation are local," he said.